Federal Reserve Bank of Dallas 1996 Annual Report

TheThe EconomyEconomy atat LightLight SpeedSpeed Technology and Growth in the Information Age—And Beyond | T ABLE OF CONTENTS

A Letter from the President ...... 1

The Economy at Light Speed: Technology and Growth in the Information Age—And Beyond ...... 2

The Year in Review ...... 18

Corporate Executives and Senior Management ...... 21

Boards of Directors ...... 22

Advisory Councils and Officers . . . . .24

Selected Financial Information • Statement of Condition ...... 25 • Statement of Income ...... 26 • Statement of Changes in Capital . .27

Volume of Operations ...... 28 A LETTER FROM THE |1 PRESIDENT

The Federal Reserve Bank of Dallas today. Our rationale for exploring the has projected optimism in our recent possibilities here is to counter the pes- annual report essays—optimism that simism generated by current growth and the creative destruction of jobs renews productivity statistics, which seem and reinvigorates our economy (“The increasingly inadequate for our third- Churn: The Paradox of Progress,” 1992); wave service and information economy. optimism that our living standards are ❧ continuing to rise, as shown by the way 1996 was a good year for the Federal we live our lives (“These Are the Good Reserve Bank of Dallas. Our banking for me the prototypical gentleman Old Days,” 1993); optimism that our system remained sound, our regional Texas farmer. Peyton Yates left the evolution toward a service economy is economy continued to outpace the Dallas Board in April 1996 and was not a bad thing (“The Service Sector: national average, and we fully recov- replaced by Bob McNair, who had been Give It Some Respect,” 1994); and opti- ered the cost of the services we pro- serving on our Houston Board. We will mism that our dynamic economy still vided to our customers. Productivity miss J. B. and Peyton. We will also miss offers plenty of opportunity for individ- improved as we continued to provide Erich Wendl, who retired from our San uals to move up (“By Our Own Boot- more services with fewer employees. Antonio Board; Walter Johnson, who straps,” 1995). In short, we have chosen Our public programs and educational retired from our Houston Board; and to see the glass half full rather than half activities were well received by larger Veronica Callaghan and Ben Haines, empty. We have confidence in the audiences. We expect more of the who retired from our El Paso Board. All power of our free enterprise economy to same in 1997. have made valuable contributions. produce rising living standards. ❧ Internally, the most significant This year, we may be going too far, At the end of 1996, Cece Smith com- management changes in 1996 were the projecting our optimism well into the pleted three years as chairman of the retirement of Tony Salvaggio on April future. As a former economist, I’ve Board of Directors of the Federal 1 after almost 40 years of distinguished learned that forecasting is not too haz- Reserve Bank of Dallas and turned the service, and the appointment of ardous, as long as it isn’t about the chairmanship over to Roger Hemming- Helen Holcomb as our new first vice future. I’ve also learned that optimists haus, who had been serving as deputy president. have a better track record than pes- chairman. During 1997, Cece will Innovation and change are inherent simists. Besides, by 2020, I’ll be retired serve the last of her six years on the components of our free enterprise and so, probably, will the authors of Board as deputy chairman. I appreci- economy and, I believe, of our great this and the other essays cited above, ate the valuable contribution Cece has strength. Therefore, our optimism Mike Cox and Richard Alm. made as chairman. She’s a great boss. continues both for our world and for Their hook in this essay, and the 1996 also saw the retirement of our economy. reason you may want to take it more Dallas Fed Director J. B. Cooper, after seriously than a science fiction comic six years of service on the Board and book, is that their high-tech world of after previously serving on our Advi- 2020 is based on applications and sory Council on Small Business and Robert D. McTeer, Jr. refinements of technology that exists Agriculture. J. B. will always remain President and Chief Executive Officer 2

The Economyat Light Speed Technology and Growth in the Information Age —And Beyond

Fast-forward to life in the year 2020. Though it’s an overcast

winter morning, Steve and

Kim Jones wake to a sunrise

of sea gulls and warm salt-air

breezes, all synthesized by their

Sensual, Audio and Visual

Virtual Information and

Entertainment system. ANK B

by W. MICHAEL COX MAGE I and RICHARD ALM

Imagination is more important than knowledge. —Albert Einstein THE ECONOMY AT LIGHT SPEED | 3

A fixture in most middle-class homes, alized to reflect their interests. After a SAVVIE regulates the indoor environ- report on China’s efforts to clean up ment and operates 50-odd computer- the environment, Kim wants an update controlled appliances, among them the on the Chinese and American Mars Joneses’ bed. All night it reads body colony. Steve requests an interview shapes, weight, temperature and posi- with Cowboys head coach Troy Aikman, tions, adjusting to ensure the couple’s preparing for Super Bowl LIV. Business complete comfort. The bed gathers data news starts with the latest on around- on each snoozer’s heart rate, oxygen the-clock stock trading, showing the intake, bone density, neurological activi- Dow Jones industrial average surging With gears the width of a human hair, this ties and other vital signs, all of it logged past 31,000.1 micromachine component includes a linear into a memory bank that compiles a Tiny robots scrub the dishes and run rack, rack guides, a drive gear and drive daily health report. a whisper-quiet vacuum cleaner as linkage to convert rotational motion into After showering and dressing, Steve Steve remarks to Kim, “TGIT”—Thank linear motion. Photo copyright Sandia says, “Breakfast, Max.” He’s speaking to God it’s Thursday. Like most Americans National Laboratories. the family’s intelligent agent, Maxwell, a in 2020, Steve works from 9 a.m. to 4 book-sized computer that commands p.m., Mondays through Thursdays. ularly engineered composites that are the SAVVIE appliances, maintains the Steve has Max make reservations at the stronger than steel, lighter than plastic home’s environment and handles the local sports cybercade, a virtual reality and cheaper than either. Most days, family’s shopping via the Internet. Max club that simulates hang-gliding, skiing Steve works from home or his vacation comes with its own personality. On and other outdoor adventures. Having cabin, when necessary using his telecon- hearing its name, Max activates the fallen three times, Steve is resolved ferencing port to hold virtual meetings. floor-to-ceiling video wall in any room to complete his conquest of Mount Sensors follow Steve’s eyes, changing and answers in the charming Scottish McKinley. After reviewing Steve’s daily the image on the video wall to match his accent chosen by the Joneses, “Good health report, Max says, “Along with slightest shift in focus. With a word to morning, sir. What would you be having your usual vitamins, I’m recommending Max, Steve can consult with colleagues for breakfast today?” a wee extra bit of molybdenum to build in Thailand and Argentina while working Steve orders bacon and eggs without stamina for tomorrow’s climb.” with a customer in Egypt. Language a twinge of guilt. In 2020, most foods Steve works for International Micro- processors translate Steve’s English into have been genetically engineered to tools Inc., a consortium that makes Thai, Spanish and Arabic. maintain taste and texture but provide machines small enough to maneuver After kissing Steve good-bye, Kim, a optimal nutrition with less fat and choles- inside the human heart. He designs them doctor, leaves for work in her nonpol- terol. As Steve and Kim eat, they ask on a three-dimensional computer screen, luting vehicle powered by superconduc- Max for the morning newscast, person- tailoring each tool to the customer’s tive batteries that require recharging just exact specifications. With a single key- once a month. There’s no need for a 1 This number is not pulled from thin air. The stroke, he sends his designs to facto- key: the car identifies her by voice and Dow ended 1996 at 6,448, and matching the ries, where durable-product generators smell. Kim speaks only a simple com- long-term growth of 7 percent a year would put the index above 31,000 in 2020. fabricate the tiny machines from molec- mand, “Max, the office, please,” and 4 | THE ECONOMY AT LIGHT SPEED

Nanotechnology researchers are growing carbon nanotubes from which they someday hope to build ultrathin metallic electrical conductors. By polymerizing carbon into a con- tinuous, perfect graphene tube with metal atoms sealed inside, researchers make nanowires that have the potential to be as conductive as copper and 100 times stronger than steel. Photo copyright Rice University Center for Nanoscale Science and Technology.

the car responds. Steering, acceleration and virtual reality provide indelible learn- and braking are self-controlled, with ing experiences— the sights, sounds continuous feedback from the Coordi- and feel of rocketing through Saturn’s nated Travel Network linked to naviga- rings, a touch-of-a-button tour of the tional satellites that pinpoint a car’s posi- Louvre. After school, Jane designs a tion anywhere on the planet. Computers new outfit, using 3-D scanners to per- and sensors in cars and roadbeds pre- fect the fit and laser-guided machines to vent collisions. As she travels to the sew it. Ben and his pals play baseball on office without fear of accident or break- a holographic field that offers the real- down, Kim catches up on her work by ism of the Texas Rangers’ ballpark. accessing the American Medical Associ- That evening, Steve and Kim meet T his vision of 2020 may sound far- ation’s Internet site on the vehicle’s the Mings and the Huxtables at the fetched— a pipe dream, worlds away video display. Eclectic Rouge, a restaurant that offers from today. After all, the rapid progress The emphasis of medicine in 2020 is a choice of ambiance as well as entree. implied by the Joneses’ lifestyle runs on preventing disease and managing It’s Kim’s birthday, so she chooses a counter to well-publicized reports of the aging process. With new vaccines Parisian sidewalk cafe for appetizers an American economy whose growth and treatments, cavities, baldness, and the main course, then fireside at a rate has slipped. Pessimists, citing arthritis, hearing loss and the common Colorado ski resort for coffee and statistics on weakening productivity cold rarely afflict Kim’s patients. She dessert. After dinner, the three couples and gross domestic product growth, analyzes patients’ DNA to assess the head to the Jones home, where satellite contend that the economy isn’t strong risk of illnesses before they occur. linkups and fiber optic cables deliver a enough to keep hoisting Americans Where necessary, DNA therapy allows world of entertainment—everything upward. They offer a dour view: the her to implant healthy genes for those from Las Vegas shows to symphony generation coming of age today will be producing Alzheimer’s disease, multi- concerts and action movies. Thanks to the first in American history not to live ple sclerosis and heart ailments. Kim the latest holographic device, viewers better than its parents. prescribes drugs that have slowed can walk inside the film and even talk One simple fact, however, suggests aging and stopped cancers, and she can with the characters. After a final cham- that this view will be proven wrong— order cloned blood, skin, bones, organs pagne toast, the Joneses’ guests hop and spectacularly so: nothing conjured and the latest biotech breakthrough. into their self-driving cars for a safe trip up in this vision of 2020 requires any The Jones children—Jane, a teen- home, and Steve and Kim retire for the new technologies. Every device in the ager, and Ben, age 10—attend neighbor- evening, bidding Max to put out the Joneses’ lives uses 1997 science and hood schools, where teleconferencing dog, lock up and turn off the lights. technology, honed by a competitive economy into the next generation of THE ECONOMY AT LIGHT SPEED | 5

With a little help from the Jason V Primary Interactive Network and live satellite broad- casts, schoolchildren in Massachusetts explore coral reefs off the coast of Belize by guiding underwater cameras mounted on a remotely operated vehicle. Research scientists answer students’ questions, demonstrate on-site research techniques and even quiz students on their obser- vations.

Technology and Capitalism — Partners in Progress

Few Americans would deny today’s technology explosion. Even in this era of supercomputers, space travel and cloning, though, technology isn’t always seen as a boon. Amid the modern world’s hustle and bustle, nostalgia for the simpler ways of goods and services.2 With a mother greater variety, more time off, better times past is not uncommon. Techno- lode of technologies ready to shape the working conditions, more enjoyable phobes cringe at programming the next quarter century, there’s reason to jobs and other benefits. All of these VCR or installing new peripherals on believe that progress will be faster than raise our living standards but by their the PC. Apocalyptic literature, science ever—a stunning display of capital- nature aren’t easily measured. Most fiction movies and neo-Luddite ism’s ability to lift living standards. aren’t even counted in GDP. rhetoric portray technology as a dark, Ironically, though, our economic What the next quarter century of dehumanizing force. statistics may miss the show. The capitalism likely promises, then, is That is the technology of myth. The usual measures of progress—output a silent boom—a rapid economic technology of reality is a vital part of and productivity—lose touch in an age advance that will improve everyday what spurs economic progress and of rapid technological advances. As the life but elude the regular readings of raises living standards. Stone Age economy evolves, it delivers not only the economy’s vital signs.3 Statistical “high-tech” was knowing how to strike more production but also new goods tools simply can’t keep up with an flint on rock to produce a spark and and services, improved products, economy moving at light speed. ignite a fire. But even at that basic level, technology improved the lives of 2 Americans will doubtlessly enjoy the fruits of even further advances in technology over the next those who used it. They kept warmer at 25 years. To suppose otherwise would be to exhibit the shortsightedness of Charles H. Duell, night, ate hot food and slept more commissioner, U.S. Office of Patents, who in 1899 said, “Everything that can be invented has been invented.” soundly, worrying less about attacks 3 The discrepancy applies to the past quarter century as well as to the future. The Dallas Fed’s 1993 by saber-toothed tigers and marauding annual report essay, “These Are the Good Old Days,” presented overwhelming evidence that the tribes. Fast-forward through the mil- average American has a lot more than ever before. Yet the national accounts report only slow growth lennia, and it’s the same story. Today’s over the previous two decades. In their article “1974,” Greenwood and Yorukoglu (forthcoming) explain how the measured productivity slowdown over the past two decades may have been related technology is much more complex, to the rapid technological advances associated with the computer. but it still makes those who use it bet- 6 | THE ECONOMY AT LIGHT SPEED

Blending electronics with biology, neuroscience researchers have achieved long-term functional viability of cells treated with ions and implanted these cells into study animals. In the not-too-distant future, researchers hope to use the technology to treat neurodegenerative diseases such as Parkinson’s disease.

ter off. We are warmed by gas and merger. In California’s gold rush era, electric furnaces, nourished by food meeting might have meant a boat trip heated in microwave ovens, and pro- around the tip of South America. As tected by locks, alarm systems and time went by, the bankers would have 911 operators. Technology leads to found the train faster, then the airplane new products and services that faster still. With the advent of telecon- improve our everyday lives. It must. ferencing, they can now convene in a After all, every innovation must pass matter of seconds, skipping the hassle the test of the marketplace: if people and expense of transcontinental don’t want it, they won’t buy it.4 flight. Sometime beyond 2020, virtual But technological know-how doesn’t meetings and all modes of shipping just happen. Ideas are sterile until an may be made obsolete by a Star Trek- entrepreneur or a company transforms like “transporter” that zaps people and them into new goods and services or products from one place to another. better production methods. The process In a free enterprise system, there’s involves discerning consumer tastes, always competition from inventions researching, designing prototypes, and innovations that meet consumers’ obtaining financing, manufacturing, needs in a different way or make it helps us see what speeds it up or slows marketing and, often, starting all over cheaper and easier to manufacture it down. again. Blood, sweat and tears. Why go existing products. Most of us overlook Because technology in large part through it? this “minor” feature of a market-based drives growth, stepping up the pace of Profit. Capitalism gives incentives economy. When we catch a bargain on invention and innovation increases to innovate by bestowing profit on airfare, see our long-distance phone the speed of economic progress. As those who bring successful products rates plummet, get a good deal on a car with most economic activities, putting to market. Just as important, it readily and so on, we welcome the low prices technology to work has a lot to do with shifts money, people and other that result as today’s companies com- incentives. An economy will produce resources from producing yesterday’s pete for market share. But the existence technological change faster when the goods and services to what con- of airplanes, telephones, automobiles costs of doing so go down or the bene- sumers will buy today and tomorrow. and our other amenities we owe to fits go up. Several factors influence the Capitalism’s ability to unleash innova- another kind of rivalry that capitalism speed of the process: the breadth and tion and invention lies at the very promotes. It’s the competition from the depth of a society’s existing endow- heart of the great legacy of the Ameri- next generation of goods and services, ment of technology, the introduction can experience—economic progress. made possible by the relentless of inventions with wide-ranging uses, Successive generations of trans- impulse in human beings to make portation show how new products themselves better off by improving life 4 The list of patented inventions that didn’t come along to compete with existing for everyone else. quite make it illustrates the point. There wasn’t much of a market for the boomerang ones. Suppose bankers in New York By its very nature, capitalism seeks bullet, eyeglasses for chickens, coffins with and San Francisco want to enter into a progress. Understanding this fact escape hatches or fire escape suspenders. THE ECONOMY AT LIGHT SPEED | 7

flat-screen displays and the Internet— more slippery than glare ice, that all of which already exist, at least in virtually eliminate friction? Those prototype. Entrepreneurs could use the technologies, and many more, are same technologies to produce the sports already being readied for use in new cybercade, Steve’s virtual office, the generations of products. Researchers Joneses’ home entertainment amenities are working within the cells of living and the learning experiences offered by organisms. Biotechnology may lead to the schools Jane and Ben attend. treatments for diseases and the pro- the time it takes for products to spread The National Automated Highway duction of synthetic organs, but it is throughout society, and overall market Systems Consortium, led by General already making possible clothing that size. In assessing the possibilities of Motors Corp., is at work on a self- kills germs, bugs that gobble up toxic the future, it’s more useful to look at driving automobile. The Global Posi- waste, enzymes that soften blue jeans these forces—the dynamics of how tioning System already helps truckers, and cholesterol-eating peanuts with a technology soaks into society—than taxi drivers and farmers. Satellite- shelf life measured in years, not statistics that say more about where based navigational systems are an months. (See Exhibit A in foldout: “25 we’ve been than where we’re going. option on some 1997 car models. Technologies for the Next 25 Years.”) What’s already in place offers to Scientists at New Mexico’s Sandia America enters the 21st century quicken economic progress. National Laboratories already produce steeped in a culture of invention and Our inventory of technology is micromachines with gears the width of surfing a tsunami of technology. By large and growing. Despite the a human hair. The Human Genome one estimate, more than half the store rapid-fire introduction of new products Project to map the location and of human knowledge has been pro- in recent decades, we still have a large, sequence of 100,000 genes, expected duced over the past 50 years. In the relatively untapped stock of techno- to be finished by 2003, should allow United States, the number of scientists logy in the pipeline. The Joneses’ future doctors to detect and treat and engineers working in research and lifestyle in 2020 suggests applications diseases through DNA analysis.5 development has doubled since the for dozens of modern-day break- And the Joneses’ lifestyle only hints early 1970s. More than half of U.S. throughs. A “smart” bed, for example, at what’s to come from our laboratories, patents have been issued in the past 40 could churn out a daily medical report think tanks and entrepreneurs. The years. The number of new products using magnetic resonance imaging, a potential boggles the mind. Many of put on the market annually has tripled technology that helps doctors make the most promising projects involve since 1980, and with so much R & D medical diagnoses by showing the tinkering with the basic elements of life occurring, companies are likely to details of soft tissues the way X-rays and matter. In molecular engineering, keep offering innovative goods and reveal bones. The SAVVIE system, for example, scientists are creating services at a furious pace. including faithful, tireless Max, might whole new materials, forged atom by 5 Even the Joneses’ three-day weekends draw combine powerful microprocessors, atom, with astounding properties. on recent experience. The average workweek artificial intelligence, voice recognition, How about a fiber stronger than steel fell from 36.9 hours in 1973 to 34.5 hours in 1990. An equal percentage decline over the speech synthesis, holography, virtual yet more elastic than a spider’s web, or next 25 years would yield a 31.4-hour work- reality, fiber optics, high-definition TV, perhaps one-molecule-thick coatings, week in 2020. 8 | THE ECONOMY AT LIGHT SPEED

If you think self-driving cars and preprogrammed destinations are far-fetched, think again. Global Positioning System (GPS) technology can already track objects anywhere on Earth via computerized receivers and satellites in space. Right now, GPS technology is being used in some rental cars to provide security and to tell drivers the most efficient route to their destinations. Taxis and commercial fleets are being dispatched and managed using GPS.

Today’s inventions are pro- viding big spillovers. The para- chute is a very useful product, espe- cially when an airplane’s engines conk out at 10,000 feet, but it hasn’t had the same impact on the way we live as the internal combustion engine, the tele- phone or the jet airplane. Every so often, an invention comes along that really rocks the world, largely because it has far-reaching applications and serves as a building block for further invention. The wheel, the plow, the printing press and the steam engine are examples of technologies that gen- erated significant spillovers. Had elec- machines and automatic tellers to air this year, will ramp up to 1.6 billion.6 tricity not been harnessed for use more traffic control systems and the We may look back on the microproces- than a century ago, the modern house- dinosaurs of Jurassic Park. The micro- sor as an invention more pivotal than hold would have few of the conven- processor is adding “smart” features to the printing press. (See Exhibit C in iences we take for granted. No televi- many everyday products. Today’s cars, foldout: “Technology Spillovers.”) sions. No refrigerators. No phones. for example, have more computing In 1801, J. M. Jacquard devised a Simply put, some inventions carry power than the lunar landing module binary control system on punched more weight than others. (See Exhibit of the Apollo 11 mission that put cards to program a loom to weave a B in foldout: “Not All Inventions Are Americans on the moon. And even preset pattern. Thomas Edison’s light Created Equal.”) more applications are just over the bulb gave people a reason for In our time, it’s the microprocessor horizon, as time and imagination point installing electric wiring in their —the tiny “brain” of the personal us to new ways to use microprocessors. 6 Predicting just how far microprocessor speed Meanwhile, the computer chip is get- computer—that’s producing spillovers could go by 2020 would be about as silly and spawning waves of new and ting even more powerful. At the start as saying, “Where…the ENIAC is equipped improved products. These little elec- of the 1990s, the fastest chips could with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only handle 94 million instructions per tronic marvels make hundreds of other 1,000 vacuum tubes and weigh only 1½ modern creations possible—from fax second. The next generation, due out tons”—Popular Mechanics, March 1949. THE ECONOMY AT LIGHT SPEED | 9

A computer at the Institute for Genomic Research in Gaithersburg, Maryland, connected to a DNA sequencer automatically produces an image of a section of DNA. Identifying the genetic code of humans at the rate of about 10,000 genes per month with the help of supercomputers, scientists expect that all the building blocks of life will soon be completely mapped. Other researchers are at work building a silicon computer chip with rows of DNA molecules and microelectronic circuitry that will analyze DNA 100 times faster than current methods. The implications for international human genetic research are phenomenal.

Today, the PC is part of our tech- times faster by the end of this year. nology inventory, contributing to new Each invention makes the next one waves of invention. It would be easier because of the way spillovers impossible, for example, to envision kindle a fire that feeds on itself—one the Internet, one of today’s wonder technology fueling development of technologies, without the computer. another. If there is any alchemy in free The Internet and the computer, in turn, enterprise, this is it: technology pave the way for the next wave of spillovers. advances—search engines to explore New products are spreading the World Wide Web, high-speed faster. Although feasible in the late modems, gadgets that access the Inter- 1800s, electric power didn’t become net through the television set, the soft- universal until the mid-20th century. ware to design home pages and intelli- The first automobiles arrived on Amer- gent agents that automatically sift ican roads in the late 1800s, but the through the oceans of information country still had more horses than cars homes. Christopher Latham Sholes available in cyberspace. The Internet into the 1920s. The technology for tele- invented the typewriter in 1867 to may be particularly powerful in vision came in the 1920s, but the produce legible letters more quickly. driving technological change because invention didn’t reach America’s Ben Logee Baird produced the first it reduces the cost of new discoveries living rooms in large numbers until the working television in 1926. Ted Hoff by putting the latest research online at early 1950s. These examples illustrate of Intel Corp. invented the micro- the touch of a button. a fact of technological life: the time processor in 1971 as the indispensable And the ripple effects from the PC between invention and diffusion can component of the hand-held calcu- don’t stop with computer-related be decades or more. lator. None of these inventors envi- industries. Computational biology, a But as lightning-fast communica- sioned the PC. Yet binary program- branch of science that uses computers tions spread information faster and ming, electricity, the typewriter key- to locate and code genes, illustrates consumers grow more sophisticated, board, the cathode-ray tube, the how the PC’s increasing power puts new products are emerging more microprocessor and hundreds of other technology and progress on an even quickly than in the past. It took 55 inventions were available for the West faster track. Biologists are already iden- years to get the automobile to a quarter Coast hobbyists and entrepreneurs tifying six to 10 new proteins a week, of the U.S. population. The telephone who contrived the first crude personal and with more powerful microproces- required 35 years; the television, 26. computers in the mid-1970s. sors, the process is likely to be three Now look at some recent innovations: 10 | THE ECONOMY AT LIGHT SPEED

After vaporizing a sodium pellet with a laser and forming an atomic beam from the debris, researchers at Bell Labs use lasers to slow the atoms’ movement and create a thick “soup” of light particles, which cool the atoms to a record 240 millionths of a degree below absolute zero. The final step in the process is to shoot a powerful beam through the area to trap the atoms.

a quarter of U.S. households owned a personal computer within 16 years of its introduction. For the cellular tele- phone, the time shrank to 13 years.7 The Internet is coming into commer- Markets are getting larger. The dismantling of trade barriers can cial use even faster than the PC or the Larger markets increase the incentive to open whole new markets to U.S. pro- cell phone. (See Exhibit D in foldout: introduce new technology. It’s simply ducers. For many products yet to “The Newer, the Faster.”) a matter of payoff. Had Alexander come, the market will be global, so New products follow a pattern. At Graham Bell lived on a small island the rewards for successful innovation first, the latest innovations are expen- with a population of 10, he’d have figure to be even greater. sive and perhaps tricky to use, so their had little to gain from inventing the

market consists of a handful of telephone. Fortunately for Bell—and 7 Even the microwave oven and VCR illustrate wealthy gadget lovers. Over time, the 20th century denizens—he intro- the speedup in diffusion with the introduction of the microchip. The VCR was invented in products become cheaper and more duced his invention into a time with 1952 and the microwave in 1953. When the consumer-friendly through mass pro- millions of potential customers, microchip was introduced in 1971, less than 1 duction and improved design. What spread out on a continental scale.8 In percent of households had either. Riding the cost-cutting wave of the microchip, however, a was once a luxury becomes an every- the 1990s, of course, many new prod- quarter of American homes enjoyed both by day necessity. The companies that ucts enter a market of hundreds of 1986—in just 15 years. make the products can then expand millions of customers. 8 Said another way, Thomas R. Malthus had it rapidly, chalking up sales and adding Population is only one way markets exactly backward when he predicted that Earth’s population would outstrip its resources, grow. Rising incomes add to the number new jobs. Can there be anything better leading to ever-growing poverty. In a free enter- for society—new and better products of people who can afford to splurge on prise system, growing population (market size) for consumers, increased sales for the latest bells and whistles. Falling prompts more innovation, which stimulates the growth process. There is no guarantee of transportation costs and quickening companies, more jobs for workers and avoiding Malthus’ dismal scenario in anything more fuel for future progress? information flows can enlarge markets. other than a market-based system. THE ECONOMY AT LIGHT SPEED | 11

However useful for many purposes, total output is a figment which would not exist at all, were there no statisticians to create it. —Joseph Schumpeter

Strict logic is a stern master, and if one respected it, one would never construct or use any production index. —Arthur F. Burns Exhibit ᕡ Don’t Count On It

GDP statisticians just “can’t get no respect.” As if their job isn’t hard already— Estimates of Bias in the figuring out how to tally into one grand number all those apples, oranges and U.S. Consumer Price Index everything else we buy— new measurement problems arrive every day as mar- AUTHOR(S) POINT ESTIMATE kets give us more for our money. Advisory Comm. to Study the CPI (1996) 1.1 Improvements in product quality and new goods create measurement problems Michael Boskin (1995) 1.5 that are commonly acknowledged. But more difficulties stem from GDP’s failure Congressional Budget Office (1994) .5 to value variety and customization. American consumers can enjoy the cuisine of Michael R. Darby (1995) 1.5 more than 40 countries today, as compared with just a handful in the 1970s. We W. Erwin Diewert (1995) 1.5 can choose from among twice as many automobile producers, which offer more Robert J. Gordon (1995) 1.7 makes and options than ever. Microbreweries have brought us an extended array Alan Greenspan (1995) 1.0 of beers, with some outlets carrying nearly 400 kinds. We have more variety in Zvi Griliches (1995) 1.0 soft drinks, tennis shoes, magazines, radio stations, martial arts classes, coffee, Dale W. Jorgenson (1995) 1.0 amusement parks, cereal, sport utility vehicles, toothbrushes and on and on. Vari- Jim Klumpner (1996) .4 ety and customization enrich our lives because they allow us to select character- Lebow, Roberts and Stockton (1994) 1.0 istics we value highly, but to the statisticians every car is a white Chevrolet. Ariel Pakes (1995) .8 Shapiro and Wilcox (1996) 1.0 Then there are preventive goods and services. Antilock brakes and air bags help Wynne and Sigalla (1994) 1.0 prevent collisions and injuries. Safety caps on pill bottles keep children from Equally weighted average 1.1 ingesting poison. Fat-absorbing proteins allow overweight people to avoid

SOURCE: Moulton (1996). expensive diet programs. Statisticians can’t measure goods unseen: the accident

Bias in CPI Inflation that doesn’t happen. A vaccine might someday eliminate tooth decay. Instead of fixing cavities, dentists might build houses or design Web sites, with no effect on overall GDP. But, meanwhile, we would have the benefit of the holes that aren’t

140 Per capita GDP in people’s teeth. What aggregate statistic could show this gain? (Thousands of 1987 dollars)

120 2.2% growth Statisticians are aware of the measurement quandary surrounding GDP and, in an effort to improve the statistics, are likely to reduce the gap between revisions of 100 the inflation index from 11 years to four or five. Economists have recommended changes that would lower our estimates of CPI inflation by an average of 1.1 per- 80 cent, thus crediting more real growth to the economy. That’s a huge revision— 60 indeed, a doubling of our estimated growth rate—considering the fact that GDP per capita grew at an average annual rate of just over 1 percent during the 1973–96 40 1.1% growth period. It means that per capita GDP could be one-third higher than we had

20 thought possible by 2020 and double what we had expected by 2055.

But even with the changes, statisticians will miss a lot of what’s going on. 0 1973 1983 1993 2003 2013 2023 2033 2043 2053 2063 What a Difference 1.1% Can Make 12 | THE ECONOMY AT LIGHT SPEED

Exhibit ᕢ Man Does Not Live by GDP Alone

Far more than any other measure, GDP is used to gauge America’s economic progress. Fact is, though, we take our progress in ways other than GDP. “The reduction of work- ing hours is one of the most significant ‘products’ of economic evolution.”* Yet GDP gives the economy no credit for gains in leisure. Although measures of productivity— The Misunderstood output per hour at work—credit time off, they generally miss leisure time taken at work. Economy (See Exhibit 4: “The Way We Work.”) Both GDP and productivity statistics fail to capture other aspects of improvement in our Understanding how free enterprise lives, such as better working conditions. And they fall short of capturing the value of new stimulates progress gives us good reason and better products, increased variety and customization, and better for optimism about America’s future. products that are preventive in nature, such as cures. working The system is working to perpetuate (See Exhibit 1: “Don’t Count On It.”) conditions and even accelerate advances in our living standards. The irony is that the ECONOMIC RESOURCES more leisure numbers don’t agree. Progress is show- physical capital ing up everywhere but in the statistics.9 higher productivity The problem, in part, lies in the new goods people’s time tools we use. The national income technology higher quality and product accounts, developed in greater variety In short, the economy works to produce whatever we want, the 1940s, arrive at GDP by toting up preventive not just GDP. (See Exhibit 3: “Maslow’s Hierarchy of Needs.”) the value of goods and services the output *Austrian economist Joseph Schumpeter. economy produces. These accounts do a reasonably good job of measuring more GDP traditional output—tons of steel, bushels of wheat, cases of toothpaste, tables, chairs, haircuts. Add it all up, decline of 99 percent. Meanwhile, 1981. But the VCR didn’t make it into and you’ve got GDP.10 our measures of inflation show a 180 the consumer price index until 1987, Much of what we get, however, isn’t percent increase in the price of light after its price had fallen to under $300. actually what we buy. We don’t really bulbs and fixtures.11 The result is an The pocket calculator, invented in want cars—we want transportation. We overstatement of inflation and an 1971, harnesses more computing power don’t really want telephones—we want understatement of true growth. than a $750,000 room-sized mainframe to communicate. We don’t really want Such measurement problems occur light bulbs—we want light. time and again whenever markets give 9 One notable exception is Wall Street, where a The distinction isn’t facetious. The us more for our money. Improvements bull market has pushed the Dow up over 250 percent since the start of the decade. everyday light bulb, for example, is a in product quality, new goods, greater 10 To arrive at “real” growth, a common proxy for readily countable object that can be variety and customization, preventive how well the economy’s doing, statisticians easily included in GDP: all we need to goods—all can widen the gap between adjust the GDP numbers to account for rising know is how many are sold and at true and measured GDP. (See Exhibit 1: prices. If the numbers overstate inflation, growth will come out equally low, suggesting what price. The light it produces, how- “Don’t Count On It.”) that the economy is weaker than it really is. ever, isn’t so tangible. Yale University’s The measurement problems are par- 11 By progressing from less to more expensive William Nordhaus looked at the price ticularly acute when technology is lighting equipment—from candles to lamps of light and concluded it has fallen moving rapidly. Take, for example, new to light bulbs—without accounting for the service each provides (lumens), the price of from 40 cents per 1,000 lumen hours goods. Today’s VCRs provide better ser- light is recorded as rising, even though it in in 1800 to a tenth of a cent today, a vice than those that sold for $1,125 in fact has sharply declined. THE ECONOMY AT LIGHT SPEED | 13

Now more than ever, we depend on computers to complete our daily activities. In our service and information economy, computer applications will grow expo- nentially and improve our lives in ways we have yet to imagine and cannot easily measure.

radar screen, the Internet is barely reg- istering a blip.14 Take a moment to contemplate the irony: just when the economy is most successful—when it produces the most worth for the least cost—the gap between true and mea- sured GDP growth is the greatest. The economy can get the least credit when it’s accomplishing the most. (See Exhibit E in foldout: “The Language of Revolution.”) But the problem is deeper—even of the 1950s but didn’t show up in the longer and require less maintenance, more fundamental. Our economy is consumer price statistics until 1978, manufacture stereos that reproduce not simply mismeasured, it’s misun- after its price had fallen well below truer sound, grow tomatoes that don’t derstood. $100.12 The personal computer was turn to mush when frozen, make clothes The economy has never tried to pro- ignored by the statistics until 1987, that fit better and require less care, duce GDP: it tries to produce happi- when its cost to the average American improve mammograms to detect tumors ness, or satisfaction. And there’s a lot had fallen from a lifetime of work to lit- at an early stage and pluck free informa- more to life than GDP. (See Exhibit 2: tle more than two weeks’ worth. When tion from cyberspace. In each case, “Man Does Not Live by GDP Alone.”) cellular telephones came on the market we’re getting more of what we want at In the information age, our economy in 1984, consumers paid as much as the same or lower prices, befuddling the is providing benefits beyond those $3,500 for the convenience of on-the-go well-intended number crunchers. easily captured by GDP. When making communication. Now the phone often Statisticians keep track of cost— a list of needs and wants, most people comes free, an inducement to sign with that’s all they have to count. The econ- start with food, clothing and shelter. a cellular service provider.13 Cell omy produces worth—that’s what After that, they move on to safety and phones won’t have a place in the price people want. These aren’t always the security and leisure time, then perhaps index until 1998, when at least 30 per- same concept, and they diverge as to some of the “fun” aspects of life, cent of Americans will own one. The technology enables the economy to such as entertainment, travel and cul- result, in each of these cases, is an over- deliver more worth at less cost. If estimation of inflation and an under- medical science invented a 1-cent pill 12 statement of real growth and progress. that cured all our ills, it would be The first pocket calculators cost more than $600. Statisticians wouldn’t be stymied if worth a lot but cost virtually nothing. 13 Competition has reduced the monthly cost of these gains could be instantaneously Sound ludicrous? Consider the Inter- cellular service, too. The average local monthly tallied in the numbers that track the net. In trying to find a way to charge bill went from nearly $100 in 1987 to under economy. It simply cannot be done. customers for accessing Web sites, $50 by 1995. 14 With rapid advances in technology, new companies have decided our smallest U.S. researchers, say, can travel in seconds from Ukraine to the UK in cyberspace at vir- and better products are coming at a unit of money—1 cent—is too much. tually no cost, whereas alternative modes of dizzying rate. We buy cars that last A 1/10-cent unit is needed. On GDP’s travel would cost thousands of dollars. 14 | THE ECONOMY AT LIGHT SPEED

Global communications have already been revolutionized by the fiber optic cable, which transmits pulses of light instead of electrical current. As researchers expand the technology, market forces will move new products and services into our daily lives with greater speed.

tural enrichment. Beyond that, most of much as possible. We’ve progressed breaks. What are workers’ concerns in us seek personal fulfillment, such as from narrow productivity concerns to the 1990s? Meaningful work, respect, the satisfaction that comes from a “have a nice day.” What working con- empowerment, social activities, well- worthwhile or enjoyable job. This list ditions did Americans tolerate decades ness programs and family benefits. shouldn’t surprise us. It reflects the ago for the sake of productivity? Foul What’s more, there’s evidence that influential work of Abraham Maslow air, bad lighting, hazardous sub- workers are using more of their on-the- (1908–70), the American psychologist. stances, long hours, inadequate sanita- job time for socializing, running Maslow’s pyramid, a staple of psychol- tion, inflexible schedules, repetitive errands, attending colleagues’ retire- ogy, reveals a hierarchy of needs and tasks, the risk of death. Few of today’s ment parties, going outside to smoke, wants buried deep in the human workers face the on-the-job risks of selling their kids’ Girl Scout cookies, psyche. (See Exhibit 3: “Maslow’s Hier- their grandparents. Modern work- exercising in company facilities—a archy of Needs.”) At the most basic places are well-lit and air-conditioned. little bit here, a little bit there. It all adds level are the physiological needs. With Workplace deaths and accidents are at up: time-diary surveys find that the gap those met, we move up to safety, social all-time lows. Hours at work have fall- between actual weekly work time and needs, self-esteem and, at the pinnacle en for decades. Many workers have what’s reported in government statistics of the pyramid, self-actualization. flexible schedules, including regular rose from one hour in 1965 to six hours As Americans grow wealthier, our today. But neither the GDP nor produc- physiological needs are being increas- tivity statistics reflect job time spent on

ingly met, and there’s a shift in wants self- socialization, personal business or from basic products to ever more actualization relaxation while at work.15 (See Exhibit intangible outputs. There are plenty of self-esteem 4: “The Way We Work.”) examples—from personal physical fit- And what about work that’s fun? social needs ness gurus and Internet chat rooms to Most folks these days seek work they

ecotourism and early retirement. One safety enjoy. Yet the standard statistics are apt of the biggest yet most overlooked to register economic regression if we examples is improvement in our work- physiological ing conditions. 15 Productivity statistics capture the gains in Exhibit ᕣ Americans today are less willing to leisure time away from work because they Maslow’s Hierarchy measure output per hour at work. But GDP bow to the deity of productivity and of Needs makes no attempt to include the value of any devote ourselves to churning out as leisure, whether on or off the job. Exhibit B TOP 10 INVENTIONS Not All Inventions AND DISCOVERIES Are Created Equal 1 Electricity 1873 From chewing gum to electricity, all inventions are an effort to raise our living 2 Microprocessor 1971 standards. A few make it, most don’t, but some inventions are clearly more 3 Computer 1946 earthshaking than others. Perhaps the best way to judge an invention’s signifi- 4 DNA 1953 cance is by its extent of spillovers—connections to other goods and services that 5 Telephone 1876 it either makes possible or makes cheaper to produce. This box lists the top 10 6 Automobile 1886 inventions and discoveries of modern times—open, of course, to dispute. What 7 Internet 1991 shouldn’t be overlooked, however, is that four of the top 10 are relatively 8 Television 1926 recent—from the past 50 years. 9 Refrigeration 1913 10 Airplane 1903

Exhibit C MICROPROCESSORS AT WORK Technology Spillovers Navigate air traffic in our skies Guide lasers used to cut metal, diamonds and corneas The microprocessor. First it helped with such minor tasks Read zip codes and sort mail as addition. Now it’s helping us decipher the code of the Manage weather-tracking systems that span the globe human genome. Create special effects in movies Scan prices of goods in checkout lines Invented just 25 years ago, the microchip already has Keep inventories and records enabled the invention of thousands of smart consumer Track packages at carrier superhubs products. The answering machine, pocket calculator, caller Route phone calls worldwide ID device, camcorder, CD player, personal computer, digital Run copiers and fax machines in the workplace and home camera, fax machine, microwave oven, organizer, pace- Direct robots in automobile manufacturing plants maker, pager, pocket translator, laser printer, remote con- Reduce static and interference in cellular transmissions trol, radar detector, synthesizer and VCR are just a few. The Operate automatic teller machines chip resides unseen in most products, its functions vital Pilot sewing machines in custom-fit blue jeans factories though increasingly taken for granted. In cellular phones, Chart 3-D seismic surveys used in oil exploration microchips translate voices to electronic signals and back, Locate a child in distress reduce interference, and store and execute programmed Control temperature and time in microwave ovens functions. In automobiles, they control carburetion, timing, Design new drugs Fly planes transmission, suspension, emissions, brakes, air bags, seat Mix paint positions, navigational aids, engine diagnostics, keyless Translate languages locks, instruments and more. The sample of the microchip’s Coordinate traffic lights varied uses at the right helps tell the story. Settle transactions between customers But this is just the beginning. As the microchip gets Monitor optical networks inside dams smaller and faster, its applications are gaining momentum. Improve the functioning of our cars Identify us by our fingerprints, iris, voice or scent More and more, it’s not speed but our own imaginations Teach parrots to talk that limit how and where chips can be used. Connect people and information over the World Wide Web Exhibit A 25 Technologies for the Next 25 Years

LASERS TELECOMMUNICATIONS Light amplification by stimulated emission of radiation. The technology of communications at a distance. Talk to any- Measure velocity and distance. Determine and record shape body, anytime, anywhere. (cavity). Survey and map. Level. Assess space. Cruise timber (determine tree diameter and height). Clean surfaces. Cut metal, wood, diamonds or corneas. Weld. Drill. Carve objects. Inlay. Remove wrinkles in skin. Destroy tumors. Eradicate garbage. Reduce vascular prominence. Prototype images. Heat treat. Read bar codes, CDs. Measure vibration.

HOLOGRAPHY The process of recording and displaying information in a three- dimensional lexicon. Replicate 3-D images. Improve ID cards. OPTICS Secure authentication. Thwart counterfeiters. Record copious data. The genesis and propagation of light and the effects that it undergoes and produces. Magnify and focus. Control visual aberrations. Transmit signals, voices, information. Probe endo- VIRTUAL REALITY scopically. Sense remotely. Illuminate. Coat materials. Detect The interactive computer-aided simulation of the world humans displacement. Gain vibration immunity (as in telescopes). experience through their senses. Animate roller-coaster rides, Control motion. Switch optically. Compute quickly. Stabilize hang-gliding. Tour museums, the White House. Walk through satellites and spacecraft. orchestras. Explore caves, oceans, other planets. Perform remote surgery, endoscopy, laparoscopy. Guide micromachines inside the human body remotely. Educate dynamically. Train pilots, drivers, surgeons, firefighters. Guide insects beneath earthquake rubble. Practice golf swing.

PHOTONICS The generation, manipulation, transport, detection and use of light or energy whose quantum unit is the photon. Detect and destroy airborne pollutants, irritants, allergens, bacteria, radon. GENOMICS Detect and destroy missiles, meteors. Transmit signals. The study of genes and their sequencing on the DNA structure Network wirelessly. Perform fiber optic endoscopy (using of chromosomes in the nucleus of cells (the genome), as in the lasers). Kill tumors using photosensitive drugs. Navigate vehi- Human Genome Project, an effort to identify, sequence and cles. Electrify with photovoltaic cells (solar energy). Digitize map the entire human genome. Repair or reverse genetic artwork, cinema, multimedia video, teleconferencing. defects, mutations. Create new vaccines. Improve diagnoses. Recognize gestures. Create flat panel displays, LCDs. Measure Engineer cancer-killing proteins or DNA bullets. Trigger hor- features of surfaces at atomic scales. mone production. Strengthen immunity. Cure baldness, pim- ples. Assess environmental cell damage (from radiation). COMPUTATIONAL BIOLOGY Advance DNA fingerprinting. Speciate infectious organisms. Computer-aided biological discovery. Match bits of DNA to Clone. Slow aging. known gene sequences. Search for defective genes, mutation. Assist gene therapy. Discover new drugs. Photos: Rice University Center for Nanoscale Science and Technology ARTIFICIAL INTELLIGENCE The computer modeling of human mental abilities, as in an intelligent agent—software that enables a computer to react to its environment, learn from experience and direct tasks useful to its specific owner. Manage investments, control smart appli- ances, monitor household operations, shop for cars—all on behalf of the principal customer. Track specific companies. Search, retrieve and filter information across the Internet— SMART PRODUCTS news, weather, sports, products, schools, companies of direct Products employing one or more microprocessors programmed interest to the customer. to perform specific useful functions. Smart consumer goods: Refrigerators track household food inventory; beds and toilets monitor health; chairs adjust for comfort; cards facilitate INTERNET exchange; locks facilitate keyless entry; skis bend and stiffen as An interconnected network (web) of computers, each serving needed. Smart machines: Cars travel without drivers, colli- information to whoever is connected. Locate information on any sions; sewing machines tailor to recorded personal patterns. subject, anytime. Send mail, shop, bank, invest. Buy tickets, Smart materials: Parts warn of excessive stress, heat; clothing make reservations, study menus. Visit friends, club members, reacts to temperature. coworkers. Peruse companies. Job hunt.

INTEGRATION TECHNOLOGY Computer telephony integration (CTI), including, more broadly, cable, wireless and satellite systems, radio and television broad- casting, traffic control and appliances in an expanded Internet. THE MICROPROCESSOR See who you’re talking to. Video conference. Control (block, A one-chip computer. identify, cull) incoming calls. Visit remotely with intelligent agents. Monitor asthma via modem. Shop, bank, order movies, COMPUTER vote. Control equipment, send digitized images from afar. Meet An electromechanical device potential dates. that has logic and memory and can be programmed to perform specific functions.

BIOTECHNOLOGY Applied knowledge of the natural biological factors that affect life. Engineer foods to eliminate undesirable characteristics and add desirable ones. Engineer disease- and insect-resistant NANOTECHNOLOGY plants. Increase food production. Clean up waste and pollu- The precise and purposeful manipulation of matter at an atomic tants. Soften blue jeans. Manufacture disinfectants, fungicides, level (1 billionth of a meter). Otherwise known as molecular engi- germicides, bactericides, biocides, herbicides and slimicides. neering. Make superconductors. Create flawless diamonds, more Make biodegradable packaging, preservatives, rust and scale powerful and perfect lenses, biological sensors. Make thin films removers. Reduce oxidation. Reduce insect problems (fire ants, (organic, metallic, diamond). Manufacture perfect bearings, killer bees). Create new dermal tissue, cartilage, heart valves, rotors. Achieve microscopic adhesion (paint, glue, DNA). Gain or blood, hair follicles. Grow human organs in animals. Engineer reduce elasticity. Make tiny machines the size of microbes to new drugs, vaccines and pharmaceuticals. Propagate vegetation. break down toxic waste, kill pests, attack viral diseases. Create new life forms. Reverse environmental contamination. RECOGNITION TECHNOLOGY Identification of people or objects by their characteristic shape, sound or smell. Shape recognition: Recognize faces, features, iris- NOISE CANCELLATION TECHNOLOGY es, emotions. Identify objects. Guide robotic arms. Improve qual- Computer-aided noise negation through the process of inverse ity control. Detect defects, forgeries. Digitize form for patterns, wave generation. Reduce noise in airplanes, industrial machin- templates. Sound recognition: Voiceprint and identify individu- ery, household appliances (vacuum, lawn mower). Reduce als. Gain keyless entry. Translate languages. Recognize material vibration in engine gears, motors, machines. Reduce road noise. stress (such as worn brake pads). Smell recognition: Identify indi- Eliminate static and disturbance in wireless voice and video viduals. Detect fire, decay, pollution, gas leaks, drugs, bogus per- transmissions. Reduce background noise in speech recognition. fumes. Analyze breath for illness. Sniff wounds for bacteria, Treat tinnitus (persistent ringing in the ears). infection. Recognize and remove airborne odor, dust, pollen.

MICROWAVE The transmission, amplification and reception of a very short electromagnetic wave (0.25 to 100 centimeters in wavelength). Transmit voice, data, facsimile and video via satellite and wire- less systems. Track weather via Doppler radar. Guide and land aircraft. Cook, heat, dry, clean, sanitize.

WIRELESS The remote transmission of analog and digital signals via the GPS wave spectrum. Facilitate satellite and cellular communica- Global Positioning System. Orbiting satellites used to ascertain tions: cordless and cell phones, pagers, wireless cable (Direct the exact position (latitudinal and longitudinal coordinates) of TV), wristwatch phones, wireless digital modems, cordless an object anywhere on the Earth’s surface. Coordinate taxi pick- appliances. up and delivery. Till soil, bulldoze ground inch by inch. Pinpoint cars, missing children, pets. Help the blind negotiate unfamiliar areas. Plan travel routes.

BIONICS The merging of biological, electronic and mechanical systems. ROBOTICS Develop implants to help the deaf hear, the blind see. Pump The use of mechanical and electronic equipment to perform the drugs to diabetics. Pace or defibrillate hearts. Restore neural functions of humans. Weld, paint, handle materials, move pack- sensation. Improve prostheses. Meld microchips and bugs, ages and equipment. Assemble vehicles, computers. Fight fires. robots and animals. Decontaminate facilities. Navigate hazardous areas. Vacuum, clean floors, windows. Farm (field robots using GPS). Cut grass. Perform surgery. Explore the ocean. Mine, maintain aircraft. MATERIALS SCIENCE The study of how structural and electronic materials behave at all levels (from quantum to fracture mechanics) so as to MICROMACHINES improve their performance and devise new materials. Create The manufacture, at the micron scale, of gears, hinges, motors, light, strong, noise-absorbing composites for car and aircraft pumps and other mechanical structures. Often not visible to the bodies, high-temperature alloys and ceramics for jet engines, human eye. Probe the body and clean arteries, locate tumors, biocompatible materials for surgical implants, fast (3-D) semi- measure the strength of a single heart muscle cell. Sense strain. conductors, high-temperature ceramic superconductors. Mine intelligently. Make smaller, faster microchips. Manufacture materials by plasma spraying. Exhibit E

The Language of Revolution Bit BOOT UP Browser BYTE Cache

“If your PC has enough MIPS and your modem CD-ROM Chat line CLIENT/SERVER CPU enough bits, then boot up, log on to your ISP and browse cyberspace for the Web site using your CURSOR Cyberspace DISK DOS DOWNLOAD favorite meta-search engine. From the home page, download version 2.1 software, move your Driver E-MAIL Encryption FLOPPY Geek mouse to the main menu window and surf to the Net chat line. When your E-mail icon pops up, GIGABYTE GUI HACKER Hard drive HITS encrypt your response to avoid packet sniffers and Web heads or other hacker geeks trying to Home page ICON IDE ISP LAN LAPTOP export viruses and crash your hard drive.”

Huh? Log on MEGAHERTZ MIPS MODEM

One test of whether times are revolutionary is Monitor MOTHER BOARD Mouse ONLINE how fast language changes. And if we’re not mov- ing fast, where are we getting all these new words? Packet sniffers PC Pixel RAM ROM Just look at how our vocabulary has grown in the past two decades to describe the computer and the SEARCH ENGINE SOFTWARE Spam Internet. Try finding these words, phrases or acronyms in a 1970 dictionary. If they exist at all, Surf the Net URL Version 2.1 VIRUS they’ll have a totally different meaning.

You won’t find Internet listed either. Web heads WEB SITE Window THE SPREAD OF PRODUCTS INTO AMERICAN HOUSEHOLDS

Percent ownership* 100 Television Airplane Radio 90 Telephone Micro- wave 80 Electricity VCR Automobile 70

60

50

40 PC

30 Cell Internet phone

20

10

0 1 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 Years since product invented SOURCES: U.S. Bureau of the Census (1970 and various years); *Percent ownership refers to the fraction of households that enjoy each product, Cellular Telecommunications Industry Association (1996); except for the airplane, automobile and cell phone. Airplane refers to the percent- The World Almanac and Book of Facts (1997). age of air miles traveled per capita relative to miles traveled in 1996; automobile refers to the number of motor vehicles relative to persons age 16 and older; cell phone refers to the number of cellular phones per registered passenger automobile.

SPREAD OF PRODUCTS TO Exhibit D A QUARTER OF THE POPULATION The Newer, the Faster Year Years As the economy evolves, it takes less and less time for new invented to Product ▼ spread products to spread into the population. It took 46 years for a Electricity 1873 46 quarter of American homes to be wired for electricity. Getting Telephone 1876 35 phones to a fourth of America took 35 years; cars, 55. More Automobile 1886 55 recently, however, the PC required only 16 years, the cellular Airplane 1903 64 phone 13 and the Internet seven. Even the microwave oven and Radio 1906 22 VCR illustrate the speedup in diffusion since the microchip’s Television 1926 26 introduction in 1971. Though both products were invented in VCR 1952 34 the early 1950s, as late as 1971 fewer than 1 percent of house- Microwave oven 1953 30 holds had either. Riding the cost-cutting wave of the microchip, PC 1975 16 however, a quarter of American homes enjoyed both by 1986. Cellular phone 1983 13 Internet 1991 7 THE ECONOMY AT LIGHT SPEED | 15

With 25 dishes, Goonhilly Earth Station complex in Cornwall, England, is the largest operational satellite station on the planet. The complex provides the next generation of vehicle tracking and monitoring through Global Positioning System technology. By making use of worldwide satellite coverage, the system can continually track objects (including the family car) anywhere on the planet.

quit a job we’re good at but don’t like in A Future of happens in the economy as it moves order to take one that’s more enjoyable. Fast Growth into the 21st century. It just doesn’t make good sense. We are fast departing a time when We take our progress in ways other The very notion of economic progress can be measured by GDP or than GDP. progress is an artifact of the modern, any other simple tally of what the The economy today reflects our technology-rich era. Until the advent economy produces. If we become fix- wealthier society’s preferences for of capitalism in the 18th century, the ated on the numbers and fail to imag- harder-to-measure consumption. As world’s living standards changed ine the possibilities, we may miss one we grow richer still in the future, we only slowly. The French farmer of the of the greatest periods of economic can expect society to spend more of its 17th century lived, worked and died advancement in history. Worse yet, if time, energy and income addressing pretty much like the Roman farmer of we judge 21st century progress by needs that are further and further from the 1st century B.C. The same cannot 20th century measures, we may infer the physiological. Pity the poor statis- be said for our world: living stan- that our system is failing and in need tician with the job of tracking our dards rise from generation to genera- of repair by government. increasingly elusive economy. tion. We are in the throes of one of That is the bad news. By their very nature, the foibles of history’s great bursts of technology, Free enterprise is America’s greatest our statistics are hard to overcome. put to use quickly and effectively by welfare program. For more than two Critics of our national accounts can a vibrant market economy. centuries, the system has worked to offer only an educated guess at the It would, of course, be good to have make our lives better. Whatever we’ve inaccuracies. Taken together, however, statistics that capture all the nuances wanted—new and improved products, the glitches imply that the numbers of the economy as it evolves to meet more leisure, better jobs, easier lives— that gauge our economy aren’t giving our needs. That’s probably too much it has provided in abundance. us a fair reading of what’s going on. to expect. Expense and complexity The pessimists fret that our best days Most important, the inaccuracies prob- make a daunting task of tracking an are behind us. They are wrong. We ably are worse than they were a decade American economy centered less and stand poised on the brink of a new era, or two ago, and they are likely to get less on tangible output. Our measure- one endowed with technology and even worse as we move into the 21st ment technology cannot keep pace teeming with opportunities. The future century and beyond. In short, our with the rest of our technological offers even faster economic progress. progress is becoming increasingly hard progress. Relying on our existing mea- We can keep up with the Joneses. to capture with our measurement tools. sures, we’re going to miss a lot of what That is the good news. 16 | THE ECONOMY AT LIGHT SPEED

Exhibit ᕤ The Way We Work

For most of us, work is a major part of life. And better working conditions Deaths per 100,000 workers have routinely been a product of progress, right along with more GDP. This 45 is evident not just from the steady decline in worker death rates but also 40

from a comparison of our work concerns today versus yesterday. In the 35 early 1900s, our work worries centered on safety, fatigue, long hours, exces- 30 sive heat, poor ventilation, high humidity, bad lighting, exposure, disease, lack of adequate toilet facilities and rigid schedules. Today, we seek inter- 25 esting and fun jobs with meaningful work, nice offices, employee activities, 20

flexible hours, empowerment, wellness classes, communication, employee 15 counseling and the ability to telecommute. 10

We also appear to demand more personal time at work. Time-diary surveys 5 show that Americans today take up to six hours per week of leisure on the 0 job, as compared with only one hour in 1965. ’30 ’35 ’40 ’45 ’50 ’55 ’60 ’65 ’70 ’75 ’80 ’85 ’90 ’95 Decline in the What are some of the ways employees use their recorded work hours other Worker Death Rate than to work? SOURCE: National Safety Council (1996).

Arrive late after dropping off the kids Leave early to pick

up the kids Go to parent–teacher conferences Visit the Average weekly hours doctor or dentist Talk on the phone to friends Chat with 7 coworkers Go outside to smoke Give blood Play solitaire 6 on the computer Browse the Internet for personal stuff Attend wellness classes Sell cookies for the kids Raise 5 funds for charities Visit with friends via the Internet Call 4 automated tellers Exercise (even in employers’ facilities)

Call talk radio programs or contests Read the paper, a 3 book or a magazine Attend parties or showers Write per- 2 sonal correspondence Leave to run errands Make a grocery list Perform club duties Take long breaks Pay bills Nap 1

A little bit here, a little bit there, we’re spending our day more the way 0 we’d like. 1965 1975 1985 Time Spent Not Working at Work The point is not that American workers are cheating their companies. On SOURCE: Robinson and Bostrom (1994). the contrary, it’s all a part of progress. We’re not automatons, enslaved to productivity as if we were still in the fields or on an assembly line. One way we take the gains of technological progress is to simply enjoy life in an economy that, more and more, transcends measurement. THE ECONOMY AT LIGHT SPEED | 17

ACKNOWLEDGMENT Gordon, Robert J., prepared statement in Pakes, Ariel, statement in “Consumer Price “The Economy at Light Speed: Technology “Consumer Price Index: Hearings Before the Com- Index: Hearings Before the Committee on and Growth in the Information Age–And mittee on Finance, United States Senate,” Senate Finance, United States Senate,” Senate Hearing Beyond” was written by W. Michael Cox and Hearing 104-69, U.S. Government Printing Office, 104-69, U.S. Government Printing Office, 1995, Richard Alm. The essay is based on research con- 1995, 122–26. 44–8. ducted by Cox, vice president and economic advi- Greenspan, Alan, prepared statement in Price, C. W., Orval Simpson, Dale Wolf, sor, Federal Reserve Bank of Dallas. “Review of Congressional Budget Cost Estimat- Charles Woodward, F. J. Moss, W. R. Basset and ing: Joint Hearing Before the House of Represen- Others, Working Conditions, Wages and Profits SELECTED REFERENCES tatives Committee on the Budget and the Senate (Chicago: A. W. Shaw, 1920). Advisory Commission to Study the Consumer Committee on the Budget,” Serial no. 104-1, U.S. Robinson, John P., and Ann Bostrom, “The Price Index, “Toward a More Accurate Measure of Government Printing Office, 1995, 130–49. Overestimated Workweek? What Time Diary Mea- the Cost of Living: Final Report to the Senate Greenwood, Jeremy, and Mehmet Yorukoglu, sures Suggest,” Monthly Labor Review 117 Finance Committee,” December 4, 1996. “1974,” Carnegie–Rochester Conference Series on (August 1994): 11–23. Berndt, Ernst R., Zvi Griliches and Neal Rap- Public Policy, forthcoming. Schumpeter, Joseph, Business Cycles: A Theo- paport, “Econometric Estimates of Prices Indexes Griliches, Zvi, prepared statement in “Con- retical, Historical, and Statistical Analysis of the for Personal Computers in the 1990s,” National sumer Price Index: Hearings Before the Commit- Capitalist Process, vol. 2 (New York: McGraw- Bureau of Economic Research Working Paper tee on Finance, United States Senate,” Senate Hill, 1939). Series, no. 4549, November 1993. Hearing 104-69, U.S. Government Printing Office, Shapiro, Matthew D., and David W. Wilcox, Boskin, Michael J., prepared statement in 1995, 129–32. “Mismeasurement in the Consumer Price Index: “Consumer Price Index: Hearings Before the Com- Jorgenson, Dale W., statement in “Consumer An Evaluation,” NBER Macroeconomics Annual mittee on Finance, United States Senate,” Senate Price Index: Hearings Before the Committee on 1996 (Cambridge, Mass.: MIT Press, 1996), Hearing 104-69, U.S. Government Printing Office, Finance, United States Senate,” Senate Hearing 93–142. 1995, 109–15. 104-69, U.S. Government Printing Office, 1995, Sherwood, Mark K., “Difficulties in the Mea- Burns, Arthur F., Production Trends in the 36–41. surement of Service Outputs,” Monthly Labor United States Since 1870 (New York: National Klumpner, Jim, “Fact and Fancy: CPI Biases Review 117 (March 1994): 11–9. Bureau of Economic Research, 1934). and the Federal Budget,” Business Economics 31 Slifman, L., and C. Corrado, “Decomposition Cellular Telecommunications Industry Asso- (April 1996): 22–9. of Productivity and Unit Costs,” Board of Gover- ciation, “Wireless Growth Sets New Annual Lebow, David E., John M. Roberts and David J. nors of the Federal Reserve System, mimeo, Records,” media release, September 19, 1996. Stockton, “Monetary Policy and ‘the Price Level,’ ” November 18, 1996. Congressional Budget Office, Is the Growth of mimeo, Federal Reserve Board, 1994. W. E. Upjohn Institute for Employment the CPI a Biased Measure of Changes in the Cost Moulton, Brent R., “Bias in the Consumer Research, Work in America: Report of a Special of Living? (Washington, D.C.: Congressional Bud- Price Index: What Is the Evidence?” Journal of Task Force to the Secretary of Health, Education get Office, October 1994). Economic Perspectives 10 (Fall 1996): 159–77. and Welfare (Cambridge, Mass.: MIT Press, 1973). Darby, Michael R., prepared statement in Nakamura, Leonard, “Is the U.S. Economy U.S. Bureau of the Census, Statistical Abstract “Consumer Price Index: Hearings Before the Com- Really Growing Too Slowly? Maybe We’re Measur- of the United States, various years; Historical Sta- mittee on Finance, United States Senate,” Senate ing Growth Wrong,” Federal Reserve Bank of tistics of the United States: Colonial Times to Hearing 104-69, U.S. Government Printing Office, Philadelphia Business Review, forthcoming; “Is 1970, Part 1, 1975. 1995, 173–76. U.S. Economic Performance Really that Bad?” Fed- U.S. Department of Energy, Energy Informa- Diewert, W. Erwin, prepared statement in eral Reserve Bank of Philadelphia Working Paper tion Administration, Housing Characteristics “Consumer Price Index: Hearings Before the Com- no. 95-21/R, April 1996; “Measuring Inflation in a (Washington, D.C.: Government Printing Office, mittee on Finance, United States Senate,” Senate High-Tech Age,” Federal Reserve Bank of Philadel- various years). Hearing 104-69, U.S. Government Printing Office, phia Business Review, November/December 1995, U.S. Department of Labor, Bureau of Labor 1995, 115–18. 13–25. Statistics, Compensation and Working Condi- Famighetti, Robert, ed., The World Almanac National Safety Council, “Work, 1995” in tions, June 1996; CPI Detailed Report: Data for and Book of Facts, 1997 (Mahwah, N.J.: World Accident Facts, 1996 ed. (Itasca, Ill., 1996). January 1994, March 1994. Almanac Books). Nordhaus, William D., “Do Real Output and Veblen, Thorstein, The Theory of the Leisure Foulkes, Fred K., Creating More Meaningful Real Wage Measures Capture Reality? The Histo- Class: An Economic Study of Institutions (New Work (New York: American Management Associ- ry of Light Suggests Not,” Yale Cowles Founda- York: MacMillan, 1899). ation, 1969). tion Discussion Paper no. 1078, September 1994. Wynne, Mark A., and Fiona D. Sigalla, “The North, Peter, The Wall Chart of Science and Consumer Price Index,” Federal Reserve Bank of Invention (New York: Dorset Press, 1991). Dallas Economic Review, Second Quarter 1994, Paepke, C. Owen, The Evolution of Progress 1–22. (New York: Random House, 1993). 18 | 1996 ANNUAL REPORT

Nineteen Ninety-Six:

Throughout 1996, the Federal Reserve FINANCIAL SERVICES Bank of Dallas built upon its long-term In 1996, the Dallas Fed continued to goals of economic growth, stability and offer enhanced services for financial leadership for the Eleventh District. institutions in the Eleventh District. As part of its continuing emphasis on Particular emphasis was placed on customer service, the Bank increased ECONOMIC OVERVIEW expanding electronic payments and its customer base and volume in elec- The Eleventh District posted its 10th settlement options for financial insti- tronic check imaging services and successive year of growth in 1996. tution customers in order to promote implemented improvements to the The regional economy again outper- the development of a more efficient processing of automated clearing- formed the nation’s, although growth and effective payments system. house (ACH) and currency services. occurred at a more modest pace than In currency and cash services, the To better serve financial institutions in recent years. The construction Bank provided additional flexibility in the Eleventh District, the Bank industry posted strong gains in the for warehousing currency for the Fed- began implementing a risk-based commercial arena, which offset a eral Reserve System and the Bureau of approach to banking supervision and modest decline in residential con- Engraving and Printing (BEP). The continued to be a leader in the devel- struction. The banking sector contin- completion of vault expansion early in opment of automated tools to assist in ued to do well, with credit widely the year enabled the Dallas Fed to store the supervisory process. The Bank’s available throughout 1996. The oil 280 million notes for the BEP and ship public policy and education efforts and gas industry performed excep- 61 million notes to other Federal focused on free market themes and tionally well, helped by higher prices Reserve districts. In currency process- international economics and finance, and technological improvements that ing, the Dallas Fed expanded its auto- particularly with respect to Mexico increased productivity. mated control and perpetual inventory and the rest of Latin America. High-tech industries continued to tracking systems to each of its three rebound. Weak activity in semicon- Branch offices. As Texas phased out ductors, however, held high-tech paper food coupons in favor of an elec- manufacturing growth to a rate of only tronic debit card system, the Bank 2.5 percent, down from 7.3 percent experienced a 92.9 percent decrease in in 1995. A severe drought hurt the the number of paper food coupons it farming and ranching sectors. received, credited and destroyed. The Although labor supply constraints Dallas Fed consolidated commercial kept economic growth in check, book-entry tenders with the San Fran- Texas’ unemployment rate in October cisco District to increase efficiency in was its lowest in 15 years. the sale of Treasury bills, notes and A strengthening Mexican economy bonds to financial institutions. helped generate increased export During the year, the Bank expanded demand for the District. In the first half the provision of check imaging ser- of 1996, one-third of all Texas exports vices to its Houston and San Antonio went to Mexico. For the year, Texas Branch offices. Other electronic pay- exports to Mexico grew 34 percent. ments system improvements included 1996 ANNUAL REPORT | 19

The Year in Review

software enhancement to allow elec- trict, the Dallas Fed conducts examina- tronic transmission of check images tions for safety and soundness and for and electronic check adjustments, and compliance with consumer protection the added capacity for customers to laws and the Community Reinvest- transmit deposit control documents ment Act (CRA). To reduce the burden electronically. The District’s volume of BANKING SUPERVISION AND associated with supervisory activities automated clearinghouse transactions DISCOUNT AND CREDIT and to better serve our stakeholders, rose 23 percent in 1996, reflecting the Aggregate financial data reported to the Dallas Fed began implementing a continued success of the Dallas Fed’s the Dallas Fed showed that banks in risk-focused approach to bank supervi- Alliance 98 partnership with auto- the Eleventh District continued to sion. This approach should make the mated clearinghouse associations. The thrive in 1996. Continued loan growth, supervisory process more efficient and volume of electronic transfers of funds combined with stable net interest mar- less intrusive, as more time is devoted also increased by 15 percent. Conven- gins, again produced a solid return on to planning and preparing for an exam- tional paper check volume increased banking assets. Asset quality ratios ination to tailor it to the risk profile slightly more than 1 percent during remained favorable, and capital levels of individual institutions. Making the year, despite the growth of elec- continued at historic highs. greater use of available technology will tronic services. Processing of ACH Although consolidations and merg- be a key factor in achieving this super- transactions was centralized into one ers reduced the number of banks in visory objective. In that regard, the national system in 1996, which the District from 1,030 in 1995 to 986 Dallas Fed is the development site for helped reduce the Fed’s automated in 1996, five new bank charters were the National Examination Database support costs and lower the price of granted. The trend of converting and has been named the Federal ACH services for customers. banks to branch offices continued, Reserve Bank responsible for coordi- Working to communicate informa- with the number of branches increas- nating software development for use in tion to the financial community, the ing from 3,008 to 3,184. The Dallas the supervisory process. Bank held focus groups throughout Fed processed 284 applications— The Dallas Fed’s discount window the District and check operations compared with 255 in 1995—for made 263 loans in 1996, primarily seminars in various cities. Presenta- mergers and acquisitions, changes in through its seasonal lending program. tions to financial institutions and the control and management, and other Total credit extended decreased from general business community stimu- actions requiring regulatory approval. $791 million in 1995 to $643 million lated use of ACH origination and Reflecting the solid condition of the in 1996, in part because of the highly direct payment services. The Dallas industry and statutory changes length- liquid position of many District insti- Fed also conducted workshops on the ening the time between examinations, tutions. Treasury’s new Electronic Funds Tax the Dallas Fed conducted 308 exami- The 48 state-chartered banks under Payment System. nations, 59 fewer than in 1995. Of the the Dallas Fed’s supervision in 1996 308 examinations, 42 were reviews for represented 4.9 percent of all insured compliance with consumer and civil commercial banks in the District and rights laws. As the supervisor of state held about 2.8 percent of insured com- member banks, bank holding compa- mercial bank assets. The 505 bank nies and foreign agencies in the Dis- holding companies under Dallas Fed 20 | 1996 ANNUAL REPORT

supervision last year controlled 599 rate systems, and featured former production of several publications insured commercial banks that held Argentine Minister of the Economy aimed at students and teachers. The about 31 percent of all insured com- Domingo Cavallo. Among the Bank’s Federal Reserve System launched the mercial bank assets in the District. major research themes for 1996 were Fed Challenge competition in 1996, About 56 percent of the District’s com- the impact of the peso devaluation on and a five-member student team from mercial bank assets were controlled by the region and the effects of electronic the Eleventh District won the national holding companies headquartered in technology on the U.S. money supply. monetary policy competition. Other other districts; the remainder were The Bank also presented two art activities included a monetary policy controlled by independent banks in exhibits, featuring works by Mexican conference for the academic commu- the District. Thirty-four foreign banks artists Ruben Leyva and Diego Rivera. nity and an intensive week-long from 12 countries operated 16 state- The Bank continued to provide pro- program for teachers titled “Exploring licensed agencies and 27 representa- grams and publications to communi- Monetary Policy.” tive offices. cate broader public policy objectives The Bank continued to provide and key economic topics through its information relating to the promotion six regular economic publications and of community development invest- several special publications. Other ini- ments, the Community Reinvestment tiatives included a conference on the Act and other consumer laws through role of free enterprise in solving public education, outreach and technical policy problems, “Replanting the assistance activities. Along with an RESEARCH AND Seeds of Free Enterprise: Grassroots annual community development lend- PUBLIC AFFAIRS Solutions to Public Policy Problems”; ing conference and the bimonthly The Bank’s research and public out- the conference “Supervision—Or Will newsletter Banking & Community reach efforts promoted free enterprise It Be Super Revision?” sponsored by Perspectives, the Bank produced A and explored the intricacies of Ameri- Houston Baptist University in coopera- Banker’s Quick Reference Guide to ca’s economic partnership with Mexico tion with the Houston Branch, which CRA, which is being used nationally and other Latin American countries in focused on shaping a partnership by the Federal Reserve System; Texas 1996. The Bank’s Center for Latin approach to lending; and “Job Creation Colonias: A Thumbnail Sketch of the American Economics cosponsored the and Destruction in a Global Economy,” Conditions, Challenges and Opportu- international conference “Policy Rules sponsored by the El Paso Branch. nities, a special report on credit needs and Tequila Lessons” with the Univer- The Bank continued its commit- and community development initia- sidad Torcuato Di Tella in Buenos ment to economic education with tives along the U.S.–Mexican border; Aires. The conference focused on the numerous programs for university and Banking on Partnerships: A Digest ripple effect of the Mexican peso crisis and high school educators, sponsor- of Community-Based Organizations in and the sustainability of fixed exchange ship of a student essay contest and the Houston. CORPORATE EXECUTIVES | 21 AND SENIOR MANAGEMENT

CORPORATE EXECUTIVES Standing (from left): Helen E. Holcomb, First Vice President and COO, Federal Reserve

Bank of Dallas; Roger R. Hemminghaus (Deputy Chairman), Chairman and CEO, Ultramar Diamond Shamrock Corp.

Seated (from left): Robert D. McTeer, Jr., President and CEO, Federal Reserve Bank of Dallas; Cece Smith (Chairman), General Partner, Phillips-Smith Specialty Retail Group.

SENIOR MANAGEMENT Standing (from left): Harvey Rosenblum, Senior Vice President, Research and Statistics and

Director of Research; Sam C. Clay, Vice President in Charge, El Paso Branch; J. Tyrone Gholson, Senior Vice President, Cash, Protection, Securities and Services; Larry J. Reck, Senior Vice President, Check Collection and Data Services;

Robert D. Hankins, Senior Vice President, Bank- ing Supervision, Discount and Credit, and Financial

Industry Studies; Millard E. Sweatt, Senior Vice President, Operations Analysis, Purchasing and Legal, General Counsel, Ethics Officer, Secretary to the Board. Seated (from left): James L. Stull, Senior Vice President in Charge, San Antonio

Branch; Robert D. McTeer, Jr., President and CEO; Helen E. Holcomb, First Vice President and COO; Robert Smith III, Senior Vice President in Charge, Houston Branch. 22 | BOARDS OF DIRECTORS

FEDERAL RESERVE BANK OF DALLAS Standing (from left): James A. Martin, Second General Vice President, International Association of Bridge, Structural & Ornamental Iron Workers;

Kirk A. McLaughlin, President and CEO, Security Bank; J. B. Cooper, Jr., Farmer; Gayle M. Earls, President and CEO, Texas Independent Bank;

Dudley K. Montgomery, President and CEO, Security State Bank of Pecos. Seated (from left):

Milton Carroll, Chairman and CEO, Instrument Products Inc.; Roger R. Hemminghaus (Deputy Chairman), Chairman and CEO, Ultramar Diamond

Shamrock Corp.; Cece Smith (Chairman), General Partner, Phillips-Smith Specialty Retail Group.

Not pictured: Robert C. McNair, Chairman and CEO, Cogen Technologies Energy Group.

EL PASO BRANCH Standing (from left): Hugo Bustamante, Jr., Owner and CEO, CarLube Inc., ProntoLube Inc.;

Patricia Z. Holland-Branch (Chairman), President and CEO, PZH Contract Design Inc.;

Alvin T. Johnson (Chairman Pro Tem), President, Management Assistance Corporation of America;

Lester L. Parker, President and COO, Bank of the West.

Seated (from left): Beauregard Brite White, Rancher, J. E. White, Jr. & Sons;

Veronica K. Callaghan, Vice President and Principal, KASCO Ventures Inc. Not pictured:

Ben H. Haines, Jr., President and CEO, First National Bank of Dona Ana County. BOARDS OF DIRECTORS | 23

HOUSTON BRANCH Standing (from left): I. H. Kempner III (Chairman), Chairman, Imperial Holly Corp.;

T. H. Dippel, Jr., Chairman and President, Brenham Bancshares Inc.; J. Michael Solar, Principal Attorney, Solar & Fernandes LLP.

Seated (from left): Peggy Pearce Caskey, CEO, Laboratories for Genetic Services Inc.;

Edward O. Gaylord (Chairman Pro Tem), Chairman, EOTT Energy Corp., and General Partner, EOTT Energy Partners LP.

Not pictured: Judith B. Craven, President, United Way of the Texas Gulf Coast;

Walter E. Johnson, President and CEO, Southwest Bank of Texas.

SAN ANTONIO BRANCH Standing (from left): Calvin R. Weinheimer, President and COO, Kerrville Communications

Corp.; Erich Wendl, Vice President, Webro Investment Corp.; H. B. Zachry, Jr. (Chairman Pro Tem), Chairman and CEO, H. B. Zachry Co.;

Douglas G. Macdonald, President, South Texas National Bank. Seated (from left):

Carol L. Thompson (Chairman), President, The Thompson Group; Richard W. Evans, Jr., Chairman and CEO, Frost National Bank.

Not pictured: Juliet V. Garcia, President, University of Texas at Brownsville. 24 | ADVISORY COUNCILS AND OFFICERS

ADVISORY COUNCILS OFFICERS FEDERAL RESERVE BANK OF DALLAS Financial Small Business and Institutions Agriculture Dallas

James A. Altick Stephen K. Balas Robert D. McTeer, Jr. W. Arthur Tribble KaSandra M. President and CEO, Owner and Pharmacist, President and CEO Vice President Goulding Central Bank, Eagle Lake Drugstore and Public Affairs Officer Monroe, Louisiana Home Health Care, Helen E. Holcomb Meredith N. Black Owner, Balas Farming Co., First Vice President Assistant Vice President Nancy Vickrey Robert G. Greer Eagle Lake, Texas and COO Community Affairs Officer Vice Chairman, Northern Stephen P. A. Brown Trust Bank of Texas, N.A., T. Mike Field J. Tyrone Gholson Senior Economist and Evelyn LV. Watkins Houston, Texas Agriculture and Real Estate, Senior Vice President Assistant Vice President Accounting Officer Lubbock, Texas David A. Hartman Robert D. Hankins Terry B. Campbell Mine K. Yücel Chairman and CEO, Gilbert D. Gaedcke Senior Vice President Assistant Vice President Research Officer Hartland Bank, N.A., Austin, Chairman and CEO, Larry J. Reck John V. Duca Texas Gaedcke Equipment Co., El Paso Senior Vice President Senior Economist and Houston, Texas Ron Humphreys Assistant Vice President Sam C. Clay Harvey Rosenblum Senior Vice President, First Robert D. Josserand Vice President in Charge Senior Vice President Robert G. Feil National Bank of Artesia, President, AzTx Cattle Co., and Director of Research Assistant Vice President J. Eloise Guinn Artesia, New Mexico Hereford, Texas Assistant Vice President Millard E. Sweatt Paula Lambert William C. Gruben Lee Kirkpatrick Senior Vice President, Senior Economist and Javier R. Jimenez Founder and President, President and CEO, General Counsel, Assistant Vice President Assistant Vice President Mozzarella Co., Brownsville National Bank, Ethics Officer and Brownsville, Texas Dallas, Texas Secretary to the Board Johnny L. Johnson Houston Assistant Vice President Francis Lee Robert W. Latimer Earl Anderson Robert Smith III President and CEO, President, Adobe Evan F. Koenig Vice President Senior Vice President Southwest Corporate Corporate Capital LLC, Senior Economist and in Charge Federal Credit Union, San Antonio, Texas Basil J. Asaro Assistant Vice President Dallas, Texas Vice President Vernon L. Bartee Joe D. Mitchell C. LaVor Lym Vice President Don Powell Shareholder, Director Gloria V. Brown Assistant Vice President and President, Mitchell & Chairman, President and Vice President Richard J. Burda Jenkins P.C., Attorneys James R. McCullin CEO, Boatmen’s First Assistant Vice President National Bank of Amarillo, and Counselors at Law, Lyne H. Carter Assistant Vice President Amarillo, Texas Dallas, Texas Vice President Robert W. Gilmer Dean A. Pankonien Senior Economist and J. Jay O’Brien W. Michael Cox Assistant Vice President Jimmy Seay Assistant Vice President President and CEO, Cattleman, Amarillo, Texas Vice President and John R. Phillips City National Bank, Economic Advisor René G. Gonzales Bookman Peters Assistant Vice President Mineral Wells, Texas Assistant Vice President Certified Public Billy J. Dusek Sandra M. Smith Accountant, Bryan, Texas Vice President Larry C. Ripley Kenneth V. McKee Assistant Vice President President and CEO, Assistant Vice President Tim Shell Kermit S. Harmon, Jr. Texas Federal Credit Union, ExecuTrain of Texas Inc., Vice President Sharon A. Sweeney Luther E. Richards Dallas, Texas Assistant Vice President, Dallas, Texas Assistant Vice President Joanna O. Kolson John Spencer, Jr. Associate General Counsel Charles R. Tharp Vice President and Associate Secretary Senior Vice President, Frost Partner/Manager, Tharp San Antonio National Bank, Farms, Las Cruces, Joel L. Koonce, Jr. Gayle Teague San Antonio, Texas New Mexico Vice President Assistant Vice President James L. Stull Senior Vice President in Hayden D. Watson Robert F. Langlinais Michael N. Turner Charge Executive Vice President, Federal Advisory Vice President and Assistant Vice President First Interstate Council Member General Auditor Taylor H. Barbee Bank of Texas, N.A., Stephen M. Welch Assistant Vice President Charles T. Doyle Houston, Texas Rebecca W. Meinzer Assistant Vice President Chairman, Texas Vice President and Richard A. Gutierrez Harvey Zinn Independent Bancshares Administrative Officer Marion E. White Assistant Vice President President and CEO, Inc., Texas City, Texas Assistant Vice President Southern National Bank, Genie D. Short D. Karen Salisbury Sugar Land, Texas Vice President Bob W. Williams Operations Officer Assistant Vice President Larry M. Snell Vice President Emilie S. Worthy Assistant Vice President Effective January 1, 1997 SELECTED FINANCIAL INFORMATION | 25 STATEMENT OF CONDITION (in millions)

ASSETS DECEMBER 31, 1996 DECEMBER 31, 1995

Gold certificates $ 433 $ 405 Special drawing rights certificates 399 376 Coin 49 49 Items in process of collection 1,284 333 U.S. government and federal agency securities, net 14,118 12,381 Investments denominated in foreign currencies 1,197 1,414 Accrued interest receivable 127 126 Interdistrict settlement account 218 3,287 Bank premises and equipment, net 190 191

Other assets ______14 ______15 T otal assets $18,029 $ 18,577 ______

LIABILITIES AND CAPITAL

Liabilities Federal Reserve notes outstanding, net $ 15,340 $ 15,570 Deposits: Depository institutions 1,730 2,178 Other deposits 12 13 Deferred credit items 374 258 Statutory surplus transfer due U.S. Treasury 15 18 Accrued benefit cost 42 39

Other liabilities ______9 ______9

T otal liabilities $______17,522 $______18,085 CAPITAL Capital paid in 257 246

Surplus ______250 ______246

T otal capital $______507 $______492 T otal liabilities and capital $ 18,029 $ 18,577 ______

These statements are prepared by Bank management. Copies of full and final financial statements, complete with footnotes, are available by contacting the Public Affairs Department at (214) 922-5254. 26 | SELECTED FINANCIAL INFORMATION STATEMENT OF INCOME (in millions)

FOR THE YEARS ENDED DECEMBER 31, 1996 DECEMBER 31, 1995

INTEREST INCOME: Interest on U.S. government securities $ 824 $ 804

Interest on foreign currencies ______28 ______53

T otal interest income $______852 ______$ 857

OTHER OPERATING INCOME: Income from services $ 53 $ 49 Reimbursable services to government agencies 7 9 Foreign currency gains (losses), net (104) 67

Government securities gains, net 1 —

Other income ______1 ______1

T otal other operating income ($______42) ______$ 126

OPERATING EXPENSES: Salaries and other benefits $ 77 $ 74 Occupancy expense 12 12 Equipment expense 10 9 Cost of unreimbursed Treasury services 2 2 Assessments by Board of Governors 26 23

Other expenses ______55 ______53

T otal operating expenses $______182 ______$ 173

Income before cumulative effect of accounting change $ 628 $ 810

Cumulative effect of change in accounting principle ______— ______(6) Net income prior to distribution $ 628 $ 804 ______

DISTRIBUTION OF NET INCOME: Dividends paid to member banks $ 15 $ 15 Transferred to surplus 11 — Payments to U.S. Treasury as interest on Federal Reserve notes 453 789

Payments to U.S. Treasury as required by statute ______149 ______— $ 628 $ 804 ______These statements are prepared by Bank management. Copies of full and final financial statements, complete with footnotes, are available by contacting the Public Affairs Department at (214) 922-5254. SELECTED FINANCIAL INFORMATION | 27 STATEMENT OF CHANGES IN CAPITAL For the Years Ended December 31, 1996, and December 31, 1995 (in millions)

TOTAL CAPITAL PAID IN SURPLUS CAPITAL

BALANCE AT JANUARY 1, 1995 (4,936,624 shares) $246 $246 $492 Net income transferred to surplus — — — Net change in capital stock redeemed

(7,663 shares) ______— ______— ______—

BALANCE AT DECEMBER 31, 1995 (4,928,961 shares) $246 $246 $492 Net income transferred to surplus — 11 11 Net change in capital stock issued (210,343 shares) 11 — 11

Statutory surplus transfer to the U.S. Treasury ______— ______(7) ______(7)

BALANCE AT DECEMBER 31, 1996 (5,139,304 shares) $257 $250 $507 ______

These statements are prepared by Bank management. Copies of full and final financial statements, complete with footnotes, are available by contacting the Public Affairs Department at (214) 922-5254. 28 | VOLUME OF OPERATIONS

NUMBER OF ITEMS HANDLED DOLLAR AMOUNT (Thousands) (Millions)

1996 1995 1996 1995

SERVICES TO DEPOSITORY INSTITUTIONS

CASH SERVICES Currency received from circulation 1,425,077 1,328,681 22,064 20,022 Coin received from circulation 836,223 931,406 138 153

CHECK PROCESSING Commercial—processed 1,091,459 1,071,311 648,485 614,465 Commercial—fine sorted 265,759 291,637 88,821 87,105 U.S. government checks 29,908 31,411 29,072 30,497

ELECTRONIC PAYMENTS Automated Clearing House items originated 154,479 129,472 538,058 351,043 Funds transfers processed 8,183 6,962 12,049,359 10,405,869 Book-entry security transfers 338 400 4,741,244 5,169,920

LOANS* Advances made 263 418 657 789

SERVICES TO THE U.S. TREASURY AND GOVERNMENT AGENCIES

Issues and reinvestments of Treasury securities 25 47 1,192 1,842 Food coupons destroyed 7,672 255,714 35 1,325

*Individual loans, not in thousands THE ABOUTECONOMY THE AT DALLASLIGHT SPEED FED || 29

The Federal Reserve Bank of Dallas is one of 12 regional Federal Reserve Banks in the United States. Together with the Board of Governors in Washington, D.C., these organizations form the Federal Reserve System and function as the nation’s central bank. The System’s basic purpose is to pro- vide a flow of money and credit that will foster orderly economic growth and a stable dollar. In addition, Federal Reserve Banks supervise banks and bank holding companies and provide certain financial services to the bank- ing industry, the federal government and the public. Since 1914, the Federal Reserve Bank of Dallas has served the financial institutions in the Eleventh District. The Eleventh District encompasses 350,000 square miles and comprises the state of Texas, northern Louisiana and southern New Mexico. The three Branch offices of the Federal Reserve Bank of Dallas are in El Paso, Houston and San Antonio. Federal Reserve Bank of Dallas 2200 North Pearl Street Dallas, Texas 75201 (214) 922-6000

El Paso Branch 301 East Main Street El Paso, Texas 79901 (915) 544-4730

Houston Branch 1701 San Jacinto Street Houston, Texas 77002 (713) 659-4433

San Antonio Branch 126 East Nueva Street San Antonio, Texas 78204 (210) 978-1200

www.dallasfed.org